What happens to debt when you die?

Most debts will be paid by your estate, out of your assets, before the remainder is distributed to your heirs. If the estate’s assets do not cover all the debt, much of it will be forgiven. Some types won’t, however, and rules differ from state to state.

Can you inherit debt?

When someone passes away, they leave many things to their heirs. Most of them are treasured. Family photos, heirlooms, and even homes can be part of a person’s legacy. Something that they can be remembered by. But what about debt? Do heirs inherit that, too?

If a debt collector is bothering you about a deceased relative’s debts, it’s important to know your rights. Usually, children or relatives will not have to pay a deceased person’s debts out of their own money. While there are plenty of exceptions, common types of debt do not automatically transfer to heirs when someone dies. That doesn’t mean these debts simply go away, though. Debt can significantly lower or even eliminate the assets that might be left to the family. It can even force the sale of assets, like a family home or beloved heirlooms.

Most debt is paid by the estate and assets of the deceased

Today, most people die with at least some debt. It could be credit card debt, medical bills, and/or a mortgage on a home, among other things. When someone dies, all of their belongings enter their estate and go into the probate process. The executor (see the next section) of the estate must take care of debts first, before figuring out how to disburse the rest to heirs. If there is not enough cash to pay off the debts, assets will probably need to be sold to cover the rest. If there is more debt than the entirety of the estate, most of the debt that cannot be paid off simply goes away. 

Who is responsible for paying off debt after death?

The executor of the deceased person’s estate is responsible for paying off any debts before distributing other funds or assets to heirs. In fact, the executor can become legally liable for some debt if proper procedures are not followed. The executor is normally named in a person’s will. It’s often a family member, but a person familiar with inheritances and probate, like a probate lawyer or accountant, may be a better choice.

Cosigned bills and loans

Loans and/or bills that are cosigned fall into a separate category. The loan contract often contains a clause spelling out what happens should either the borrower or cosigner die before the loan is repaid in full. In general, though, if two or more names are on the agreement, all parties are liable. That means the estate of the cosigner will be the new cosigner and will be responsible if the borrower defaults. If the deceased was the primary borrower, the estate will be responsible for the debt. If the estate cannot pay it, though, the cosigner will be responsible. This is one of the reasons many financial planners advise clients to avoid cosigning financial documents.

Special rules for some states

Each state has different laws and procedures for debt. It can get complicated, so it’s best to work with a probate lawyer if you are concerned about what the laws and procedures mean for your family. In some states, you are always responsible for your spouse’s debt after death, but only if the debt was accumulated while you were married. These are called “community property states”; they include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (as of 2022). In even more states, there are “filial responsibility laws” that may require children to cover deceased parents’ hospital bills or nursing home costs.

What debts are or aren’t forgiven at death?

The short answer is that it depends. Each type of debt has different rules, and there’s a certain order in which debts of different types are repaid. This process, unfortunately, is different for each state. Confused? Don’t worry. We can cover some of the basics here.

Transferring mortgages after death

If there are any co-owners listed on the mortgage, like a spouse, the home becomes the co-owner’s responsibility, and the co-owner owns that debt. But what happens when you inherit a house with a mortgage? If there are multiple inheritors and the will does not specify who receives the home, it can become a complicated process, and often the home will need to be sold in order to split the estate evenly. If you do inherit a home, you become the owner of that asset and the attached mortgage. You won’t have to pay all the debt back right away, but you’ll be responsible for making the monthly payments. If no one can or wants to make the monthly payments, the bank will foreclose on the mortgage and sell the house.

Medical bills after death

Medical debt and hospital bills don’t simply go away after death. In most states, they take priority in the probate process, meaning they usually are paid first, by selling off assets if need be. In some states, a spouse may be responsible for some of these bills, but otherwise they tend to go away if they can’t be paid by the estate.

Credit card debt after death?

Holders of credit card debt can make a claim against an estate for the debt, but they can’t come after family members. Sometimes, they don’t even take that step, simply writing off and canceling the debt to avoid the probate process.

Car loans

Car loans are a type of “secured debt,” which means the car itself is collateral against the debt. If the family can’t or doesn’t want to pay off a car loan during the probate process, the creditor will likely repossess the car.

Student loans

Federal student loans are forgiven after death in a lot of circumstances, but not all. Private student loans are another story. It depends on the particulars of the loan. In addition, many student loans have cosigners, which makes all parties responsible (see above).

Proper estate planning can reduce or eliminate debt

Even if you don’t think you have much to pass on, a proper estate plan can help reduce and eliminate debts and other claims against your estate, which will help you protect your legacy.

Creating a will

The first and most basic step to making sure your wishes are fulfilled is creating a clear and comprehensive last will and testament. Then, you should decide on a person who will execute that will. This can be a family member, but you may be better off using someone familiar with the process, like a probate lawyer.

Life insurance

A proper life insurance in place can help your loved ones with debt in several ways. In most cases, the death benefit goes directly to your beneficiaries and not your estate. That means a creditor cannot make a claim against it. This holds true for a small final expense policy or a whole life policy.

Gifting

One way around leaving money to your estate is to give gifts while you are still alive. These “lifetime gifts” can help family members, while also shielding some funds from creditors. There are comprehensive tax laws about how much you can give an individual, how often, and  how best to fund it, so it’s best to work with an agent and your team of tax and legal advisors to create a strategy.

Tax Strategies

In addition to protection against debt, a smart estate plan can help with taxes.  This is a concern for those with estates worth more than the $12.92 million federal estate tax exemption (2023) and some small-business owners.

This article is for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

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